COLUMN-Diversified miners' short-term challenges at odds with long-term views: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Aug 21 (Reuters) - The world's top diversified mining companies are starting to resemble choir boys singing the same hymn about cutting projects and costs.
The recent financial results of BHP Billiton, Rio Tinto, Glencore Xstrata and Anglo American were remarkably similar, as were the accompanying comments by their chief executives.
All reported lower earnings, but not dramatically so, which may be a bit of a surprise given weaker commodity prices in the first half of 2013 and widespread concern of worse conditions to come.
And all four also repeated the mantra of cost cutting and slashing capital expenditure, while at the same time trying to give equity investors more of what they want in the form of dividends and higher share prices.
The question is whether this unanimity is the right path or whether the diversified miners are going too far in a bid to boost share prices.
The financial results are interesting from a commodity markets perspective as they show that conditions in the first half of 2013 were tough, but nowhere near as bad as the doom and gloom stories about falling Chinese demand growth would have led an observer to believe.
BHP's attributable profit excluding one-offs fell to $6.12 billion in the six months to June, down from $7.18 billion a year earlier and also below the analysts' consensus forecast of $7.16 billion.
A 15 percent decline in profit doesn't look too bad when commodity prices were struggling.
BHP, the world's largest diversified miner, also gets about 30 percent of its earnings from oil and gas, thus making the S&P GSCI index a good benchmark.
The S&P GSCI declined 11.6 percent from its 2013 peak in February to a low in April, from where it has gained 7.5 percent.
In contrast, BHP's Australian-listed shares dropped 21.4 percent between their year high in February to the April low, before rallying 16.1 percent to trade around A$35.65 at midday Wednesday in Sydney.
What this shows is that BHP's share price fell harder when commodity prices were declining, but equally rallied more when prices started to recover.
The same dynamic isn't quite at work with Rio Tinto, which garners the bulk of its earnings from iron ore.
Rio's share price slipped 30 percent between its 2013 high in February and the low in June, exactly matching the decline in the Asian spot iron ore .
Iron ore has since rallied 26 percent while Rio's stock has gained only 18 percent, although the gap in relative performance may be explained by other issues facing Rio, such as its dispute with the Mongolian government over the financing of a $5 billion expansion of the giant Oyu Tolgoi copper mine.
AUSTRALIAN DOLLAR MASKS WEAKNESS
Another factor worth considering when looking at the share prices of the Anglo-Australian miners is the depreciation of the Australian dollar, which is masking some underperformance.
The Australian currency lost about 18 percent against the U.S. dollar between its 2013 peak in January and low earlier this month.
This alone should be boosting the Australian dollar share prices of BHP and Rio, given they earn in U.S. dollars but spend mainly in other currencies, and like the Australian dollar, many of these have also dropped against the U.S. currency.
What becomes clear is that the share prices of BHP and Rio are still underperforming the prices of the commodities they produce.
This indicates that equity investors haven't yet fully bought into the promises of capital discipline and cost cuts, or that they believe commodity prices are more likely to weaken than rise in the coming months, or a combination of both.
Given that the big miners only shifted their emphasis to cost-cutting and lowering capital expenditure in the second half of last year, it's probably too early for the fruits to have shown up in these latest results.
Certainly, the focus remains and it's no coincidence that BHP, Rio and Anglo American all changed chief executives last year, and in all three cases dealmakers and champions of new projects were replaced with leaders with reputations built on running tight operations.
The exception, perhaps, is Glencore Xstrata, but even here the CEO of the combined entity, Glencore's Ivan Glasenberg, has made a virtue out of trying to convince his rivals to stop building mines in a bid to change the market concern from looming oversupply of commodities to one of possible shortages in a few years.
Glasenberg may yet succeed as the winding back of capital expenditure has been relentless, especially for commodities where prices have been weak, such as coal and nickel.
While both Rio and BHP remain on track to significantly increase their iron ore output at mines in Western Australia state, Rio CEO Sam Walsh was careful to say not all 70 million tonnes of new capacity has to come on line.
BHP was cautious, but optimistic, on China's demand, a view that is becoming the market consensus amid some early signs of renewed momentum in the world's largest commodity consumer, as it ramps up infrastructure spending.
It seems that the diversified miners are caught between the competing demands of the short-term challenge to cut costs and return more profits to investors and their longer-term belief that China-led demand growth will remain positive, if not at the levels of the past few years.
The more they cater to the first demand, the less well-placed they will be if the latter view proves accurate.
Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund, and may own other shares mentioned in this article as an investor in a fund.
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